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Everything you need to know about the true cost of an employee

Making your company more efficient requires high-skilled employees capable of giving excellent results in a matter of time, but they might not be as cheap as you wish. There are many elements you must know and consider regarding the true cost of an employee before taking risks or making bad hiring.

In this article, you will learn everything you need to know about the true cost of each employee and how to calculate overhead cost per employee, which is a valuable piece of information to make the recruitment task more accurate and efficient to benefit both your company and your staff. Let’s observe:

1. What elements affect the base salary of an employee?

2. Important factors that your company needs to cover

3. Mandatory additional costs that each employee requires

4. How to optimize your business using employees’ costs?

5. How can Connect Resources help you understand and improve your employees’ costs?

1. What elements affect the base salary of an employee?

Many elements play an important role in the cost of each employee, starting with the type of job and the type of company they work at. However, there are other factors that may create differences in your employees’ salaries, even if some of them have the same job or the same tasks.

The main components are usually the location, the size of the company, the industry sector, job tasks, demand or professional skills needed in the market, qualification (which includes education and experience), performance, and success. Basically, those are the reasons that highlight why some employees cost more than others, among other reasons or factors.

But if you take into consideration many other elements that you might find unnecessary, you will be able to find the true cost of an employee. A useful tool to calculate the cost of each of them will provide you with the information you need, but make sure you take into consideration elements such as groceries, housing, utilities, health care, transportation, and many others.

If you need more help with this affair, you can always learn more about Connect Resources payroll outsourcing services, which will provide the best payroll management for your company. Besides, you can get advice about how payroll outsourcing can help you have a great employee management along with its advantages and benefits.

2. Important factors that your company needs to cover

Everything you need to know about the true cost of an employee

Apart from the basic salary that every employee should receive, we will show you a complete guide of the most important factors that need to be covered along with the main salary. These include annual bonuses, taxable income, insurance contributions, private medical, additional packages, recruiter and training costs, and more.

Keep in mind that many of these elements may vary according to the factors that we mentioned before, which are the location, size of the company, job tasks, demand, skills, experience, education, qualification, and others. They are fundamental things that will help you calculate an accurate result of the cost of an employee.

2.1. Annual basic salary

It is the main amount of money that each employee should receive within a determined period of time, but it is paid without any bonuses or additional benefits included. You may think that this is the real cost of an employee, however, if you start counting the benefits and additional amounts of money you have to invest, this number will increase eventually.

For example, the annual basic salary of an employee could be $35.000, but the true amount of money you will spend on this employee will be from $43.750 to $49.000, including some employment costs, which are usually mandatory in most of the countries. Keep reading to learn about what is included in fully loaded cost of employee and use it in your favor.

2.2. Annual bonuses

They are known for being incentives that make it easier to keep satisfied your employees, motivating them to keep doing their work with efficiency. Many companies use this method to make the work team more cooperative and efficient, which allows companies to grow and thrive exponentially in most cases.

If we put it as an example, let’s say that one of your employees receives an annual basic salary of $50.000. In this case, the annual bonus could be around $2.000. However, there are cases in which employees do not receive any bonuses and can be considered as exceptions.

2.3. Taxable income

It is known as Personal Tax Allowance, usually called tax-free too. Not everyone receives this; however, there are some groups of people with the advantage of getting additional allowances for determining reasons, which could be Disability Allowance, Blind Persons Allowance, or any other related situation.

2.5. Company pension

A company pension scheme is a special element that has been considered as mandatory in the last few years. Employers are able to offer this scheme to their employees. Keep in mind that they cannot stop employees from joining it or force them to join it. It is an employee’s decision that is considered as a benefit.

2.6. Private medical

In some countries like the US and the UK, employers offer this benefit to their staff. The private medical benefit usually includes healthcare services, such as dental care and many other standard services. However, it is not always mandatory to offer this benefit to the company’s employees, which means it is not valid in some countries.

2.7. Additional packages

Among the several employee benefits that represent a significant amount of money in the cost of an employee, you can find the additional packages that may include company car benefits, travel costs, relocation costs, and many others that your employees may need in specific cases. But as with some other benefits, these packages are not always required.

2.7.1. Company car costs

It mostly depends on the situation and the type of work that your employees have. It is a necessary benefit in case your employee’s job includes journeys between work and home. It is valid to highlight that it is for business use only. In case it is used for personal reasons, it might represent an extra cost.

2.7.2. Travel costs

Just like the previous benefit we mentioned before, travel costs are only necessary when the situation requires them, which depends mostly on the nature of the work of each employee. It is valid for journeys related to the job, and if they are not constant, then the cost will not be too high.

2.7.3. Relocation costs

In case one of your employees needs to move from the place he/she was living in, as an employer, you can offer this benefit. However, many elements need to be taken into consideration before allowing your employee, such as the entire moving process, paid leave time, furnishing, and many more.

2.8. Recruiter and training costs

Recruiting employees and training them will represent costs for the company, both money and time costs. Even if you can do this on your own, you can also count on recruitment services to make it more efficient and effective, helping you to reduce costs. You can apply manpower recruitment strategies to save time and money too.

There are plenty of ways to reduce costs when recruiting new employees, and counting on excellent resources will help you overcome the most common recruiting challenges and get the best candidates. Keep in mind that recruitment costs may include other costs, such as travel costs and location costs, in case you do not count on any recruitment services.

As for the training costs, it will depend on the number of required courses or processes to make your new employees get familiar with the company and the operations and tasks they will have to work on. These costs should cover basic needs, including health and safety awareness, which is a training course required by law.

2.9. Office setup costs

A comfortable and safe workspace is essential to make your employees feel good and productive, so you should always take into account this need. Just like some elements that we mentioned previously, this feature and its cost will depend on the type of job that each of your employees will do.

3. Mandatory additional costs that each employee requires

Everything you need to know about the true cost of an employee

Besides the benefits your employees receive, you will have to face some other costs related to them, known as payroll tax costs. The real cost of an employee includes the employer share of FICA (Federal Insurance Contributions Act) and the unemployment insurances known as FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act).

The FICA’s purpose is to cover Social Security and Medicare programs, and it is 7.65% on compensation up to the annual wage base plus 1.45% on compensation over the annual wage base. As for FUTA, companies need to pay 6% of taxes for the first $7.000 that any employee earns. On the other hand, SUTA goes between 2.7% and 3.4%.

There is another mandatory cost that companies must cover, which is the workers’ compensation insurance. It is to ensure employees against any injuries that they may be exposed to during their labor shifts. It is worthy of highlighting that this cost may vary according to the risks that each work or industry represents.

4. How to optimize your business using employees’ costs?

To summarize the previous information, the true cost of an employee is higher than it seems at the beginning. It needs to cover not only the basic salary, but also a number of benefits in kind, insurances, and tax expenses that vary according to the annual basic salary of each worker.

At this point, we can make quick math to arrive at the real cost that a company must face for each of its workers. If the basic annual salary of an employee is $30.000, and the company covers $3.651 on mandatory costs (FICA, FUTA, SUTA, and workers’ compensation), and $8.600 on total benefits, the total cost of this employee is actually $42.251.

However, you can learn how to calculate overhead cost per employee, which is a vital budgeting task that will help you optimize your business. The first thing you must do is to enter the data you currently have into your business intelligence tools. This way, you will be able to track your expenses effectively.

Analyze your budget and the cost of each employee to avoid going over budget. Starting doing this during the recruitment process that each employee goes through. You can learn more about how technology improves recruitment processes if you want to start using the right tools to make this process more efficient and accurate.

5. How can Connect Resources help you understand and improve your employees’ costs?

Connect Resources

With the many services that Connect Resources offers to its clients, such as the recruitment services or any other, you will be able to maintain and improve your efficient employee management in your company. Apart from this, you will not spend too much money on it and you can reduce costs and time.

In case you need other services, you can learn more and receive professional advice to upgrade your human resources department and the process related to the cost of an employee of your company. Besides, it will be useful to check on the guidelines for employees that should be followed during the pandemic to protect your company and your staff.

If you possess a small company or one that just started operations, you can boost your business with our services in a matter of time. For example, in case you need visas for your employees, you can learn more about this affair with us and make improvements to this situation.

Would you like to contact Connect Resources to learn more about the true cost of an employee and the way you can improve your employee management? You can call at +971 433 166 88 or send an email to contact@connectresources.ae, and you will talk to one of their representatives that will gladly answer all of your questions.

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